Friday, June 17, 2011

Leading Economic Index Points to Ongoing Growth

The Conference Board reported today that its Leading Economic Index (LEI) increased 0.8% in May to 114.7 (see chart above), with the largest positive contributions to the index coming from the interest rate spread, consumer expectations and building permits. The LEI has now increased in 25 out of the last 26 months starting in April 2009, with the only monthly decrease occurring in April of this year.

According to economist Ataman Ozyildirim at The Conference Board: “The U.S. LEI rebounded in May and resumed its upward trend with a majority of the components supporting this gain. The Coincident Economic Index, a monthly measure of current economic conditions, continued to increase slowly but steadily. Overall, despite short-term volatility, the composite indexes still point to expanding economic activity in the coming months.”

MP: Despite some recent signs of a temporary slowdown in certain areas of the economy, the ongoing upward trend in the Leading Economic Index that started in the spring of 2009 suggests that the economic expansion will continue through the rest of 2011 without interruption.

So did Milton Friedman actually recommend doing successive rounds of quantitative easing until nominal spending returns to normal levels? Let's have Milton Friedman speak for himself. Here is an excerpt from a Q&A following a 2000 speech he delivered at the Bank of Canada (my bold below). David Laidler: Many commentators are claiming that, in Japan, with short interest rates essentially at zero, monetary policy is as expansionary as it can get, but has had no stimulative effect on the economy. Do you have a view on this issue?

Milton Friedman: Yes, indeed. As far as Japan is concerned, the situation is very clear. And it’s a good example. I’m glad you brought it up, because it shows how unreliable interest rates can be as an indicator of appropriate monetary policy.

During the 1970s, you had the bubble period. Monetary growth was very high. There was a so-called speculative bubble in the stock market. In 1989, the Bank of Japan stepped on the brakes very hard and brought money supply down to negative rates for a while. The stock market broke. The economy went into a recession, and it’s been in a state of quasi recession ever since. Monetary growth has been too low. Now, the Bank of Japan’s argument is, “Oh well, we’ve got the interest rate down to zero; what more can we do?”

It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.

The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity.

Unfortunately for John Taylor, we have Milton Friedman's own words on this matter. Taylor is a nice guy, but a Republican. He allows party politics to eclipse true economic analysis.

Buddy--

Not sure MF ever said that. Find hard cite, if possible.

MF did say or write:

"I know of no severe depression, in any country or any time, that was not accompanied by a sharp decline in the stock of money and equally of no sharp decline in the stock of money that was not accompanied by a severe depression."As quoted in The Money Masters (1995)

"The Federal Reserve definitely caused the Great Depression by contracting the amount of money in circulation by one-third from 1929 to 1933"

National Public Radio interview (Jan 1996)

A lot of right-wingers try to claim the Friedman mantle.

Friedman supported legalized drugs, progessive consumption taxes to pay for the military, no homeowner mortgage tax deduction, but taxes on pollution, and lower government spending.

I own commercial property, and I take advantage of mortgage expenses and a business expense.

Judging from your sniveling, ad hominem commentary, you are unhappy in Texas. Have you thought of relocating to another Third World state or nation, such as Mississippi or Guyana? You might find happiness in a nicer place to live.

Despite some recent signs of a temporary slowdown in certain areas of the economy, the ongoing upward trend in the Leading Economic Index that started in the spring of 2009 suggests that the economic expansion will continue through the rest of 2011 without interruption.

Do you really think that the trend will continue if the Fed stops its liquidity pumping operations? It is not a big trick to show some growth if you are running a massive deficit and using newly printed money to finance that growth. But any rational economist will tell you that such 'growth' is not real and not sustainable.

The real economy in the US is in big trouble. Grain carryovers are a big problem and will put pressure on food prices. Oil supply conditions are ensuring that the 2005 record peak in conventional crude production will be difficult if not impossible to surpass. OPEC is in disarray as producing nations are now in decline and no longer able to use profits to buy off an angry public at time when the price it pays for its food is going up. The US banking system is in big trouble as the EU area banks are ready to cash in on their default swaps. Unfunded liabilities are piling up. The US is involved in several hot wars around the globe.

So you will excuse me Mark if I do not drink the Kool-Aid and remain a skeptic.

"I know of no severe depression, in any country or any time, that was not accompanied by a sharp decline in the stock of money and equally of no sharp decline in the stock of money that was not accompanied by a severe depression.""

weimar germany.

zimbabwe.

prewar hungary.

that is a totally indefensible statement. i'm sure i could come up with some more examples if i tried.

you are also dead wrong about current money not being lose by any sane definition.

real interest rates are strongly negative, even if you believe the CPI.

CPI is running at an annualized rate of 3.6%. that makes the real one year rate -3.4%.

3.6% is not "low inflation" even if you were to accept such a laughably manipulated number (actual inflation is running more like 8%, so actual real rate are more like -7.8%)

yet we see no growth nor job creation.

the reason is that you cannot create these things through monetary policy. printing money destroys real wealth and redistributes it inefficiently.

the prudent are punished as their savings erode. the reckless are rewarded as their debts shrink. this incentivizes more bad behavior in the future.

as ever, your understanding of economics appears to be a bunch of misunderstood dogma and rattle headed repetition of the same claims about japan and money that have been debunked 100 times.

you're like a sock monkey. pull the string "print money!".

inflation is anything but dead. it's high and rising. it's economic growth that is dead because of the idiot loose money policies you champion. they turned an easy bubble to clean up (internet - equity bubble in productive assets) into the hardest kind of bubble to clean up (housing - debt bubble in non productive assets).

it is not coincidence that the rise of this philosophy has seen the 2 weakest recoveries from recession since ww2 along with the most concentrated set of bubbles in US history, massive debt accumulation, and real wealth destruction.

that's because it doesn't work.

as you are painfully susceptible to evidence and unable to think clearly, i doubt you bother to look at the evidence and see that you have no support for your arguments at all, but i really recommend you give it a try.

you are dogmatic because you do not understand. you appeal to authority because you cannot comment substantively. it's as tiresome as it is devoid of value.